MicroStrategy’s Potential Inclusion in the S&P 500: A Market Analysis

Will MicroStrategy Join the S&P 500? Insights and Predictions

MicroStrategy’s Potential Inclusion in the S&P 500 – Despite MicroStrategy’s strong performance, outpacing every stock in the Standard and Poor’s (S&P) 500 over the past four years, market analysts remain divided on its potential inclusion in the index in the near future. Optimistic analysts argue that it’s only a matter of time before the company enters the prestigious index.

As of early September, the median market capitalization of the S&P 500 was $33.5 billion, according to CNBC. The 250th largest company within this index had a market value of $33.5 billion. In comparison, MicroStrategy’s market cap was $33.6 billion on September 27, placing it just above the median and signifying its strong position among major corporations.

The Bitcoin Connection and Market Cap

MicroStrategy is recognized as a significant player in the Bitcoin space, holding 266,000 BTC, more than any other corporation worldwide. This substantial Bitcoin treasury does not pose an immediate concern for the company’s long-term prospects, but some financial experts express skepticism regarding MicroStrategy’s imminent inclusion in the S&P 500. Seoyoung Kim, an associate professor of finance at Santa Clara University’s Leavey School of Business, stated, “An S&P 500 listing is ‘probably not’ coming anytime soon.”

Entry Requirements for the S&P 500

To qualify for the S&P 500, companies must adhere to specific requirements. They must be listed on one of the largest U.S. stock exchanges—like the New York Stock Exchange or Nasdaq—and generate at least 50% of their revenues in the United States. Additionally, they need a market capitalization of $18 billion or more. MicroStrategy meets these criteria; however, there is a critical hurdle.

A major issue for MicroStrategy is its profitability. According to Kim, “MicroStrategy has consistently seen a negative bottom line,” except for the fourth quarter of 2024, which was not sufficient to bring the company to an overall positive net income. Joe Nardini, co-head of investment banking at B. Riley Securities, concurred, stating that the requirement for consistent net income poses a significant barrier.

Nardini explained that MicroStrategy’s substantial BTC holdings complicate its earnings consistency. “The changes in value of the BTC are run through its earnings stream,” leading to fluctuations that could result in negative net income. This volatility may disqualify MicroStrategy from inclusion in the S&P 500.

The cryptocurrency market’s volatility also raises concerns about MicroStrategy’s suitability for the S&P 500. Russell Rhoads, a clinical associate professor of financial management at Indiana University, noted, “The larger, more mature firms that comprise the S&P 500 are less volatile,” suggesting that MicroStrategy’s stock price, influenced by Bitcoin’s fluctuations, could deter its acceptance into the index.

Unusual Structure: Not a “Typical” S&P 500 Candidate

MicroStrategy’s unique corporate structure poses another challenge. Bank of America’s private bank recently observed that the S&P 500 is filled with established corporations that provide stability, consistent returns, and dividends. Steve Sosnick, chief strategist at Interactive Brokers, mentioned that MicroStrategy does not generate revenues and earnings in a manner consistent with S&P 500 listing criteria.

Gayatri Choudhury, a senior quantitative research analyst at Bitwise, stated that MicroStrategy’s financial profile does not align with typical S&P 500 candidates. “Its revenue is volatile,” she added, highlighting the lack of consistent earnings or a reliable business model, factors usually demanded by the index. Consequently, Choudhury does not anticipate MicroStrategy joining the S&P 500 anytime soon.

Waiting for an Opportunity

If MicroStrategy’s earnings variability and Bitcoin volatility stabilize, the company may still face challenges to entry. Membership in the S&P 500 is capped at 500 companies, requiring a slot to open up. Despite this, changes occur regularly; in 2024 alone, eleven companies have been removed from the index, most recently American Airlines Group on September 23.

Rhoads emphasized the importance of the type of company being replaced, noting, “If a retailer drops out, a similar firm may be more likely to replace it rather than a technology firm.” Predicting which companies will join the S&P 500 is inherently challenging.

Could Coinbase Be a Stronger Candidate?

Interestingly, MicroStrategy may not even be the leading crypto-focused candidate for S&P 500 inclusion. According to Kim, “Coinbase is more likely to make the cut if it can show a more consistent positive bottom line.” Todd Sohn, managing director at Strategas Asset Management, echoed this sentiment, noting that MicroStrategy faces hurdles, including the need for four consecutive quarters of positive earnings.

Despite the challenges, some experts believe it is merely a matter of time before MicroStrategy secures a spot in the S&P 500. Aki Balogh, co-founder and CEO of DLC.Link, remarked, “If we see BTC grow above $100,000, then they could potentially make it based on the size of their holdings.”

Furthermore, Balogh added that MicroStrategy’s Bitcoin holdings should not be a long-term concern. “MicroStrategy is both a proxy for holding BTC and also recently announced that they’re making investments into becoming a Bitcoin development studio.”

The inclusion of MicroStrategy in the S&P 500 would symbolize a significant milestone for the cryptocurrency industry. Rhoads noted, “Anyone that owns an S&P 500 index fund will own Bitcoin once MicroStrategy makes it into the index.”

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